Welcome to the FOMC Transparency Tour: 1st Stop is the Sausage Factory

The week at least started well as the upper echelon of fund managers heard from their “well-placed sources” that Helicopter Ben had miscommunicated the FOMC position when he spoke about tapering and would set the record straight at his press conference, imbuing them with the fortitude to get long in front of Wednesday afternoon. Well, they got half the story right as he did set the record straight.

Taken alone, the FOMC minutes were positive for the market as nothing indicated that policy was going to change course. The indices acted accordingly, swaying between green and red. Then we found out that those sources were no more well-placed than a convertible parked beneath a tree with hanging bird feeders. First, the FOMC projections were released showing that the targeted 6.5% unemployment rate was now forecast to occur in 2014, not 2015, and that GDP growth was accelerating. Then, just prior to the reporter from TMZ asking Bernanke about his personal plans, his prepared remarks were released. Therein, Helicopter Ben dropped not more cash, but the bomb:

“We also see inflation moving back toward our 2 percent objective over time. If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year; and if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around midyear. In this scenario, when asset purchases ultimately come to an end, the unemployment rate would likely be in the vicinity of 7 percent, with solid economic growth supporting further job gains—a substantial improvement from the 8.1 percent unemployment rate that prevailed when the Committee announced this program.”

So here we are: the transparency thing as he explained the Fed’s thought process. The FOMC will begin to cut back this year and, depending upon the next jobs number, may do so before the third quarter ends. The point that we reach 6.5% has been moved up but that is no longer the trigger; now it is 7% accompanied by an upward bias in the economy and inflation at 2%. If only they kept that information to themselves we could have read the minutes and gone on our merry way as the market stabilized and perhaps moved higher. In the old days, pre-openness, the market took the real hit when the rate increase actually occurred and usually upon the move deep into neutral policy territory. I liked that more because the economy was then on better footing, earnings growth was apparent and valuation could withstand less accommodative policy. But this is the worst of all worlds since we likely won’t see much growth in earnings this quarter, Europe is still uncertain and China is on the verge of a credit crisis that will make 2008 look like boom times.

I can’t imagine too many visitors to Jimmy Dean’s factory leave the tour and buy a few links in the souvenir shop, anxious to cook them up when they get back to the trailers. Seems like traders feel the same way about the Fed post press conference, puking out their stocks and bonds, violating important levels of support. However, once the vision fades and their stomachs settle, a curing period that will likely take us through earnings and up to the next FOMC meeting, they will recognize a great buying opportunity– at least for stocks. Bonds, unfortunately, will stay in the grinder. For now, though, the carnage, bred through emotion, is likely done as atrophying now takes over. Within that time frame there will be peaks and valleys as volatility, courtesy of Fed transparency, becomes the norm. I’m up for nibbling for the long term but the market hasn’t corrected enough to find many real values.

Night after night, morning-to-morning, it’s the same routine. The iPad sits at the ready, less than an arm’s length away on the nightstand, sharing space with an old school Blackberry, an alarm clock separating two generations of technology. It’s the last thing I look at before I go to sleep and the first item I reach for when I wake. I’m seeking out news, waiting for the solution. That’s what I need to get off the sidelines, to put my cash to work. Sure equity valuations are cheap, that is if you believe the global economy is not worsening. Sure Treasuries are overvalued and in a bubble and asset allocation begs for a swap into equities but these factors have been in place for a year. In the interim, China has markedly slowed and Europe is in an economic near death spiral. Ergo, I need something new: a plan that will work. I am fairly confident that I know what the answers are, I’m just hoping that some variations of it appear in a Reuters or Bloomberg headline:

ECB Lends $2 Trillion to Spain and Italy – Funds Targeted for Banks;

Greece Accepts Receivership: Icahn Reveals That He is Part Greek and Agrees to Head Creditors Committee

I would settle for one out of two, the ECB lending program being my first choice. The last two days brought scant hope, with Spain’s Budget (a clear oxymoron) Minister asking for other “European Institutions” to “open up and help facilitate” a recapitalization of their banks. (http://www.bloomberg.com/news/2012-06-05/spanish-minister-urges-eu-aid-for-banks-in-first-plea-for-funds.html). I guess, a recognition by Spain that they have a problem is the first step toward a solution. Record outflows of capital and the seizing up of the banking system has a way of offsetting the effects of too many carafes of sangria at three hour lunches more so than afternoon siestas. However, there is little chance of Germany injecting capital directly into Spanish banks. And then today, we had the ECB’s Mario Draghi tell us not to worry, capital is not fleeing, hoping to dispel us of the facts. Nice try, Mario, but this will not help me sleep any better.

Here is how I believe the issue should be resolved in order to restore some semblance of sureness to the market. Actually, this is not really my original thought but rather that of an extremely successful hedge fund manager as we discussed the issues during a game of golf. However, as a part-time talking head and part-time author, I am in conflict: the former imbues me with little respect for identifying ownership of ideas, claiming all as my own, while the latter avocation imbues me with abhorrence for plagiarism. Since no one is paying for this advice, I will default to the former and provide what I believe would put the market back on firmer footing in response to Europe. While the ECB is not allowed to buy new issue debt from sovereigns, it can loan money to them. Spain will ultimately agree to a program and, in return, the ECB will provide a 30 year loan with a nominal coupon to the government, specifically targeted for the banks. This will not crowd out any other creditors, thus limiting resistance. As part of this rescue package, and in lieu of using Spiderman towels and English lessons (wouldn’t German be more appropriate?) to lure potential depositors, the banks will offer greater levels of deposit insurance, backstopped by the ECB. There will be greater, collective EU oversight to large EU banks as a condition to German participation without obligation of further German funding.

Perhaps the above won’t happen so here’s another thought. It was also reported by Bloomberg that the EU and ECB is at work on a Master Plan (http://www.bloomberg.com/news/2012-06-03/ecb-eu-drawing-up-crisis-master-plan-welt-am-sonntag-says.html) and may have something ready by the end of June. Well, that would be nice but this would have to be authored and led by someone other than Merkel’s countrymen since Germany’s last Master Plan didn’t work out well for anyone and time has done little to erase the memory. The problem is that no other European economy has the economic wherewithal to plug the dyke. I imagine that Germany does a daily calculation comparing the breakup of the currency and the potential impact on trade with the cost of being the sugar daddy for the rest of the EU, albeit without the typical prurient perks of being so benevolent. The Germans undoubtedly realize that they would have the world’s strongest currency were the EU to fail, thus crippling their own economy by making the price of their goods uncompetitive. Here’s a solution: cut off the EU like you would a drug addicted stepchild and allocate those funds to internal spending, thus inflating the D-Mark and maintaining competitiveness in global trade. Instead of the annual Oktoberfest, have a Freitagfest and a 4 day workweek, placing them on more even footing with the rest of socialist Europe. That won’t drive the DM to levels on par with the drachma but will get you moving in the right direction.

So as my search for the evidence of a solution forges on, I remain on the sidelines although even the hint of a legit solution (or of an improving US economy) will rally an oversold market. Oversold rallies, however, such as today’s (June 6), are to be sold, not embraced. Commodities will remain under pressure and steel is still a great place to be short as analysts now begin to look for losses in the upcoming quarter. Recall that last year, X reported a loss despite a combined 13% volume and price increases. Their end markets, with a slowing global economy, won’t be so kind this time around. They didn’t even bother to offer a mid-quarter update at their analyst day today.

One more thing – look for downward revisions to multinationals pick up speed as the dollar retains its strength.

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China: Yesterday’s WSJ article on Bo Xilal (page A11) highlights the issue that should provide pause to anyone blindly bullish on China and materials stocks. It reveals a story of monstrous leverage using property as collateral. When Bo Xilal rose to the top political seat in Chongqing, the city’s debt was estimated to be 162 billion yuan. At the end of 2011, at least one informed estimate approached 1 trillion yuan. I like the sound of “trillion” but it only translates into roughly $150 billion, perhaps not bad for one of China’s fastest growing cities. And maybe that’s not a lot by Western standards for a permanent population of 28 million but the rate of change is significant and places Chongqing’s debt at 100% of GDP versus China’s broader estimate for the country at 22%. The proceeds of borrowings and land sales went into highways, state owned businesses and social welfare programs. But unfortunately, these expenditures don’t throw off enough “income” to offset the cost of the leverage. (Let me know if you’ve heard this story before – perhaps while travelling through the warmer climes of the EU.) Taking on debt against land at all time high prices is exactly what got the rest of the world in trouble. Add in the debt on developers’ balance sheets and leverage at the business level through off-balance mechanisms such as LOC’s and household real estate purchases at prices that exceed current levels and the only difference between China and Spain will be the color of the rice. Of course that’s an exaggeration but suffice it to say that perhaps China does not have the iron grip on its politicians, people and economics that so many pundits, economists and portfolio managers give them credit for. With the central government’s decreasing appetite for individual excess – 感謝什麼，博 (Translation: Thanks for nothing, Bo) I doubt that there will be as much sympathy for fat cat capitalists who have traded their Mao suits for Prada as was shown to the indebted by the rest of the world. And I doubt Chongqing is the only city modernized by taking on significant debt as Bo is not the only politician seeking to climb the political ladder by leveraging the future. In fact it is estimated that local property sales accounted for approximately 40% of revenues and lending for cities throughout China. Wu and every other politician has been very clear in stating that property prices remain too high. Three cities, including Shanghai, have tried to ease property controls but the government forced their immediate cancellation. Yup, the rulers on high are resolute n sending a message that excess, driven by inflating property values at the risk of the people, is over. The only question is if they caught it in time. Fortunately, I don’t have to answer that question since the near term impact will be the same.

The great unwind in China is on its way. Let’s see how that works out as their export economy fades. And how it works out for us.

The concerns supporting a bear view on U.S. indices issues prior to yesterday’s FOMC press release were clear:

1) “I’m negative on the market because the economy is not recovering.”

2) “The Fed is killing us by keeping interest rates so low. Savings accounts are a negative carry, hurting the household.”

3) “The QE’s were a disaster and did nothing but we’ll take another serving.”

4) “The banks can’t make money with a flat yield curve.”

5) “Inflation is an issue.”

6) “Europe and China will take us down.”

In my view, the FOMC press release was perfectly turned out for everyone except for those misguided souls staying too long at the bond party. To paraphrase the statement: the economy is recovering but we’re going to keep rates low until the end of 2014. Instead of driving the markets lower, investors should do a hosanna, take a breath and start picking stocks – not any stocks, but those more dependent on the U.S. economy. The rising tide lifting all stocks is ebbing making this a great environment for stock picking.

By not hinting at a QE3 while paying homage to an improving economy and labor market – I trust the Fed’s mark-to-market much more so than their forecasts – a large part of the bear case for US equities was served a debilitating blow. After a short period of adjustment the market will continue its assent. Yes, markets do rise as the Fed tightens as long as monetary policy remains fairly accommodative. But all is not lost as to the Fed and monetary policy. As with a recovering addict in rehab who has been mainlining heroin courtesy of a benevolent pusher, the Fed will not force us to go cold turkey so I look for a modest bridge to higher rates upon the expiration of Operation Twist in June.

The focus of naysayers will now increase on the purported impact a slowing global economy may have upon the U.S. and, ultimately, our equities. What has resonated so loudly is silence on the fact that the U.S. still has largest economy in the world and that while not entirely self-sustainable, we can drive decent growth given that our reliance on the EU and China as markets for our goods is small relative to our internal consumption.

Banks, already on the upswing from improving credit, upward trending existing home sales, and being the beneficiaries of distressed European banks’ need to sell non-distressed assets at distressed prices, will soon be able to make money on a steepening yield curve. This environment should be panacea for U.S. banks providing they remain disciplined in feeding out their inventory of homes to an improving market.

Inflationary pressures caused by a weaker dollar will abate, not that the Fed ever saw them as anything more than transitory, pressuring gold but helping the consumer as will higher yielding bank accounts but pity the fool who doesn’t see major principal loss in much small moves in yield.

I continue to like the market primarily because I anticipate upside in this reporting season relative to expectations, laboring under the belief that businesses and individuals are stronger. I like the USD long versus the Euro short. I hate the Aussie dollar and added to my short; China is a drag on their export and minerals economy and they have extremely high rates that have to come down. I am long domestically focused equities. Technology continues to play an important part in my portfolio, the issue with SNDK specific to their business model (I bought today). I am opportunistically shorting steel, copper and coal on a trading basis.

Go U-S-A. U-S-A. U-S-A.

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The market of the last two days reminds me of my grandfather, Phil. He was a surly guy and had his voice been disassociated from his body, one would have envisioned a much more stout individual than he actually was. Gravity had taken its toll as he advanced into his 90’s, shrinking his frame to little more than five feet two on his tallest days. The often inverse correlation of age to patience took its toll and his gruff and demanding personality continued to overshadow a diminutive frame, expanding to a size that would better fit someone sporting the physique of Ray Lewis or Vitali Klitcshko. Phil was never indecisive in his demands but increasingly, he never wanted what he asked for. The following true story provides an example and a parallel to today’s market.

“I’ll take the sirloin,” he grumbled.

“Of course, sir. How would you like it prepared?”

“Medium” he groused in response.

The kitchen turned it out perfectly medium but his rote response, his knee jerk reaction, was to send it back.

“This is raw,” he said, misconstruing pink for red. “It needs more fire. I don’t want to see any pink. I want it well-done,” he barked, clearly contradicting his original order although he didn’t see it that way.

The waiter did as he was told and again delivered the steak perfectly prepared to order; well-done, not charred. My grandfather’s rebuke was even more harsh.

“This is burnt,” he said, chastising the defenseless waiter.

And so it went. I left significant compensatory damages behind, padding my grandfather’s meager tips, hoping to assuage my embarrassment and to maintain my good standing with the service establishment in New York City.

The moral: . While you can hardly compare ordering a steak to positioning a portfolio but if Phil had not pre-judged the result, determined to return the slab of meat even if it came out perfectly cooked, perhaps he would have been able to profit from a good result.

“There is the school of thought, of which I am not a student, that believes we shouldn’t worry about China and Europe since U.S. GDP is not overly reliant upon either Europe, 2% of total U.S. GDP, or China, 0.6% of GDP, but given that our economic revival is not particularly robust, any potential hit to growth has to be regarded seriously. And it is the strengthening domestic economy, abetted by perhaps misplaced optimism on the global economy that overshadows the current weakness abroad.”

Like most, I tend to operate from selective memory. Sometimes I have to venture far into the archives to find a pearl of wisdom, other times the proverbial ink has yet to dry. Fortunately, this occasion finds me in the latter camp leading to a trip back to March 6th. I actually present this somewhat cheekily since the S&P has had a nice move since the date I wrote the above but completing the thought, I remained bullish equities within a much reduced net long position laboring under the belief the non-US swoon would not really hit our economy until year end. That is still the case from an economic standpoint. It shouldn’t be a surprise to anyone that the massive credit issues in Europe have caused a slowdown nor should anyone be surprised about China, where economic indicators have revealed a contracting economy for 4 months. However, with the market being a discounting mechanism perhaps I was too optimistic. I went on to say:

“To bottom line it, the market is in a consolidation phase and faces the likelihood of a minor correction near term while remaining highly dependent upon data in the U.S. and continued optimism about the European and Chinese economies.”

This will update my outlook and clarify my views. The market is in a consolidation phase with a slight bias to the downside in the very near term as we are in a good news vacuum pending earnings. Optimism still reigns regarding China’s ability to manage their way out of their declining economic fortunes and the yields on sovereign debt in the countries that matter, while recently forfeiting some of their optimism, are still at much more reasonable levels. THE KEY FACTOR GOING FORWARD WILL NOW BE EARNINGS SEASON which I suspect will acquit itself well in most areas of the economy except for certain sectors, such as coal and steel, where I have been very visibly short, and which have already updated their outlook. (Every steel company, regardless of business model, has disappointed but has guided to a turn in fundamentals resulting in a nice move off the bottom. I am still short. And coal remains in a death spiral.) This will provide support for the market at that juncture but for now, in a good news vacuum, the path of least resistance is slightly lower.

But the key to a further rise in equities is the direction of US govt bonds. While flows continue into bond funds in a meaningful way and out of equities in a less meaningful manner, a situation that surprises me, I believe this will reverse. I am short through TBF and TBT because I believe most investors have come to expect unabated and unprecedented performance and don’t realize that a an 85 bps back-up in yield from 2.15% to 3% will result in approximately a 7% loss in capital, an untenable risk/reward when considering that any appreciation of Treasuries is in the best case, severely limited. And as the EU sovereigns continue to hold these levels, funds will flow from bunds and bonds into their higher yielding debt.

Within the slowing of global growth view, I remain short the Euro and Aussie dollar, materials and transportation, CSX (dicey), and long technology, big US banks, and defensive value. The market will continue to pause, but not collapse, into earnings season and unlike each of the other reporting periods since the bottom in March 2009, expectations are much lower setting up for decent equity performance for the next quarter unless sentiment regarding Europe and China fall off a cliff. I realize this straddle risks my being likened to a sell-side strategist, a label more feared than “moderate Republican” but that’s how I see it.

Another day and Diamond Foods (DMND) is still with us. I took my profits on the trade, selling the stock when it was up 7% on the day versus a decline of 1% for the broader market. Will possibly return.

I have been advocating for months that Greece be pushed into default. Perversely, this would be the best outcome for the markets and the Euro after the knee jerk reaction lower. Greece, in fact, is less important to the European economy than AIG was to the global economy, than Lehman or Bear was to the US economy. Germany’s interest is clear in keeping Greece and other profligate sovereigns in the Euro which is that it is the 50 pound weight at the other end of the barbell. Were Germany to be the even more dominant in the Euro, their goods would be less attractive, harming their export economy. This would be good for other exporters such as the US, although our goods are already cheap in relative currency terms.

I have a small short position remaining in the Euro. I cut the core position and had stopped trading around it as it moved to breach the 130 level because the market had become incredibly conditioned to a negative outcome, perhaps proof no more evident than the current level of the Euro versus other currencies despite the headlines. My short on the Euro was never based upon a break-up of the currency; it was based upon the view that there would be massive stimulus, including rate cuts, to support a weakening EU economy. Essentially, they would have to inflate to forestall a deep recession. This has been the policy outcome and I expect it to continue. I would be more comfortable sizing up the Euro short if Greece stays in the currency than if they are unceremoniously shown the door since, admittedly, perversely, I see a Greek exit as a strengthening event as the world will realize that the EU is one “sovereign” that is willing to do what it takes to address its budget deficits although this would be more of an accidental outcome than deliberate, having everything to do with Greek insouciance and an unhealthy dependence on ouzo than the execution of a strategic plan. Keep in mind the folly of the lack of any real plan by the EU: the EFSF relies on contributions from countries including Greece, Italy, Spain and Ireland. The far-reaching agreement on a more uniform budget reform process is also of negligible value since lack of adherence by the signatories will result in sanctions and fines. Of course they will have to borrow money from the IMF and the EFSF to pay these fines but that is beside the point.

Let’s just get on with it. Let Greece default, put it behind us and move on to Portugal, a country that the Germans apparently feel more kindly toward.

Despite all this, and despite Santorum mucking up Romney’s path to the nomination, I am still positive on US equities although fully anticipating a consolidation. I am not one of those in the camp hoping for consolidation because it is healthy for the markets. I’d rather see an unhealthy market go up every day although that is, of course, unrealistic.

When I was a salesperson at Salomon Brothers many years ago, I received a call from Friess Associates, an account I covered (the Brandywine Fund), inviting me to a cocktail reception at the home of Foster Friess. I had never met Foster – he had already ceded active portfolio management to his staff – but had been in his office a few times. Lining Foster’s office wall were pictures of him with Presidents and other important people. I asked why I was being so honored. Well, came the response, Foster wants your support for Rick Santorum, a candidate he is endorsing. You can send a check if you can’t attend. This was a less than subtle way of asking me to contribute to Santorum’s campaign. I said I would look at Santorum’s platform and get back to them. This was not a response they appreciated. After looking into his background, I decided very quickly that I couldn’t support Santorum and declined, offering instead to make a contribution to any children’s charity of their choosing. As with my initial response, this did not go over well. And times haven’t changed – I still can’t support Santorum and Friess still does; in fact, he is Santorum’s main backer. There is a reason these two hang together and both are scary. http://www.reuters.com/article/2012/02/10/us-usa-campaign-friess-idUSTRE8190AK20120210. And, by the way, I’m a Republican.

I sat back and marveled at the action in the global markets on Tuesday, wondering if these non-human entities had all of a sudden turned human making New Year’s resolutions to ignore underlying fundamentals and rally 2% a day. But guess what, markets don’t drunkenly warble Auld Lang Syne in symbolic banishment of times gone. There is no Lord of the Calendar presiding over the indices, ripping the pages of 2011 from the binding, erasing the memory of an ailing global economy, resetting expectations to a level of attainability where economic indicators such as Eurozone PMI indicating a contracting economy are now a positive indicator. In fact, the only symbolic symmetry I can find is in the economic hangover rattling the brains of money managers finance ministers and newly crowned technocrats the world over.

So as January rolls around we are still faced with the same positives and negatives, each release of data driving the markets, each tick of the currency market correlated to the price of commodities and equities. But here’s THE but: I am more attracted to US equities than I was in 2011. That is my resolution for the New Year BUT unlike those who resolve to lose significant weight in 2012, my complete transformation won’t happen in one day although it should endure past the next buffet – I mean, rally.

Yesterday’s Unicredit rights offering was not a positive sign for the markets. The 27 investment banks underwriting the offering reportedly accounted for three-quarters of demand for the $9.8 billion offering, a high price to pay for a call option on future fees and one which toxifies (literary alert: new word) their balance sheets in the name of fees and, no doubt, in response to arm twisting by the ECB. Shareholders were diluted to near zero and the deal was underwater from the first tick. Can’t imagine there is much appetite for these types of deals going forward as it will swell “bad” assets at the banks involved, somewhat ironically I might add.

I still believe that we will see nationalization or partial nationalization of some banks. The reason is simple: as with Unicredit, their problem loans and refinancing needs exceed their market caps. Additionally, compliance with Basil standards has led to these banks pulling in credit lines, the most immediate response, which has stifled credit and slowed economic growth. This, of course, is why the ECB has initiated their lending program. I surmise that Draghi has had conversations with the banks taking advantage of this lending facility to participate in the new issue market.

Next week is critical as Italy and Spain come to market seeking capital from charitable buyers. European debt is actually not a bad play if you can hold it longer term because it is extremely unlikely that either country will default. However, I’m not playing and believe the price they have to pay to fund themselves will be extraordinarily high and for Italy this is only the beginning of their refunding.

All of this comes down to the fact that there is still no plan to “cure” the credit crisis in Europe, absent austerity measures that will likely not be enforced or enacted to the necessary magnitude and will only be effective in continuing to drive the EU economy into recession. It is a lose-lose situation. The loan facility has removed fears of a Lehman type moment but that is not nearly enough. We still need to see the heavy artillery from the EU in the form of stimulus. For example, Italy has had one of the slowest growing economies over the last 20 years of all OECD nations. They can’t cut their way to growth. I look at the banks continuing to park funds overnight with the ECB at record levels as insider trading: they know their market better than sell-side analysts or pundits and if they are willing to take such an imbalance in rates of return in exchange for the safety of the ECB, the problems are as bad as I imagine them to be.

But China will save us all! No they won’t; they will look out for themselves and prey on the markets as they always have. They see commodity prices declining so they will not enter the markets and be the support mechanism until they are down to their last copper penny. China is on the bad end of two phenomenon: its property bubble bursting and its primary end market’s – the Eurozone – declining economy. Their trade surplus declined from $180 billion in 2010 to $160 billion 2011, numbers that any other nation would be happy with but not the Chinese. This is positive for the US but may be a short lived victory as they dropped the value of the yuan this morning, a reversal of prior policy and a move that will undoubtedly flame already tense relations with the US. This is a strong indication that the Chinese are very, and justifiably, concerned about their economy markedly slowing despite the recent PMI release. This slowing will, of course, hit the global economy but especially Australia which is why I am short the Aussie dollar, albeit small for now. Additionally, the property market in Australia is in horrendous shape and significantly hurting their banks and populous. They have to lower rates, further pressuring the currency.

Now here is the good news as I see it and it resides squarely with the U.S. market and as a devout patriot, I couldn’t be happier. The US treasury and stock markets are the global default markets of choice. Despite 2011 4Q negative pre-announcements hitting a high previously seen during two prior recessions in 2001 and 2008, the economic data is getting better. Today’s jobless claims number continues to trend downward, which I believe is a function of a smaller sampling and companies having already cut through muscle so perhaps not an indication of a vastly improving employment picture but positive nonetheless. Corporate earnings lag the improvement in the economy as companies ultimately respond by hiring more workers. However, I do see earnings estimates continuing to decline, particularly multinationals from the combination of weaker export markets and a stronger USD. Analysts are too optimistic in their S&P estimates for 2012.

So I remain relatively lightly position in equities, short the Euro against the dollar and short the AUD. The U.S. equity markets will continue to react to the worsening situation in the EU and have a tough time rising near term. However, asset allocation to equities, which I expected to see last year and perhaps we did to an extent, will ultimately drive equities higher so I don’t mind increasing my exposure opportunistically.

My preference is in defensive, domestically focused companies including healthcare, specifically managed care, nat gas, well-positioned retail, MLPs, utilities, US telecom and strong brands such as SBUX. Some of my specific holdings are: CHK (CEO continues to pay down debt and restructure production toward liquids from nat gas as he said he would), WLP (inexpensive, buying back significant stock, defensive), NS (7.5% yld, insider buying), QCOM (market leader), GM (cheap but not in love with name), KO (yield, defensive but currency issues), EUO, short FXA. Would not mind being short LNKD, GRPN, NFLX and ZNGA. This earnings season will be marked by currency adjustments and caution about Europe so I will mostly stay away from those companies playing in those areas.

Meanwhile, with some stability returning to the political scene in the US and Romney moving to the forefront, any sense of his emerging victorious in November will finally motivate US companies to spend the massive cash hoard on their balance sheet. This is not an immediate event, however.

So there you have it. Nothing much has changed, the focus required to write 20”12” instead of 2011 really the only thing new. I get the hang of that relatively quickly, usually after writing about 5 checks and filling out a few forms. The markets however, have not changed their ways at all, renouncing their resolutions after a mere two days.

In sum, I am more positively disposed to the markets and have slightly increased exposure but want to get a better glimpse of the earnings season and the critical refunding periods for European debt before getting longer.